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October, 23rd 2013

+                   INCOME TAX APPEAL NO. 41/2013

                                     Date of decision: 8th October, 2013

                                                          ..... Appellant
                          Through Mr. Abhishek Maratha, Sr. Standing


                                                        ..... Respondent
                          Through Nemo.



        Revenue impugns order dated 22nd June, 2012 in this appeal,

which relates to Assessment Year 2007-08.

2.      The issue raised is whether interest of Rs.1,26,64,315/- paid to

M/s Dharti Investments and Holding Limited on loan of Rs.25 crores

could be allowed as expenditure under Section 36(1)(iii) of the Income

Tax Act, 1961 (Act, for short) and Rs.2,32,582/- on account of

travel/statutory fees/audit fees etc can be allowed as expenditure under
ITA No. 41/2013                                                Page 1 of 7
Section 37 of the Act.

3.      The Assessing Officer had disallowed the said amounts as

expenditure under Section 37/36(1)(iii) on the ground that the business

of the assessee had commenced/was set up on 5th July, 2006. Loan

from M/s Dharti Investments and Holding Limited, it is stated, was

taken on 16th May, 2006. Learned counsel relies upon judgment of this

Court dated 9th July, 2013 in ITR No. 131/2010, titled Commissioner

of Income Tax versus Samsung India Electronics Limited.                    Our

attention was drawn to the fact that Memorandum of Understanding

between the respondent and third parties is dated 30th May, 2006 and

not 31st March, 2006, as recorded in the impugned order.

4.      The respondent-assessee is a company, which was incorporated

on 4th August, 2005.          The main objects for incorporation of the

company are as under:-

                  "1. To carry on the business as owners
                  builders, colonisers, developers, promoters,
                  proprietors,   occupiers,   lessors,   interior
                  decorators, civil contractors, maintainer of
                  residential,   commercial     and    industrial
                  buildings, colonies, mills and factorys sheds
                  and buildings, workshops buildings, hospitals
                  & nursing homes, and to deal in all kinds of
                  immovable properties whether belonging to the
                  Company or not.

                  2.    To undertake and carry on the business
                  of purchasing, selling and developing any type
                  of land or plot whether residential, commercial,

ITA No. 41/2013                                                      Page 2 of 7
                  industrial, rural or urban that may belong to
                  company or to any other person of whatever
                  nature and, to deal in land or immovable
                  properties of any description or nature on
                  commission basis and for that purpose to make
                  agreements to sell the land of the company or
                  of any body else and to deal in building
                  material electrical and civil materials.

                  3.     To erect and to construct houses,
                  buildings or civil and constructional works of
                  every description on any land of the company
                  or upon any other lands or immovable property
                  and to purchase, take on lease, or otherwise
                  own, hold, occupy, construct, erect, alter,
                  develop, colonies, decorate furnish, pull down,
                  improve, repair, renovate, build, plan, layout,
                  set, transfer, mortgage, charge assign, let out,
                  hire, sublet or sublease all type of lands, plots,
                  buildings, hereditaments, bungalows, quarters,
                  offices, flats, swimming pools, chawls,
                  warehouses, godowns, shops, stalles, markets,
                  hotels, and restaurants building, banquet halls,
                  houses, structures, construction, tenements,
                  roads, bridges, land, estates and immovable
                  properties whether freehold or lease hold of any
                  nature and description and where ever situated
                  in way and partly consideration for a gross sum
                  or rent or partly in one in other or any

                  4.    To act as an agent for purchasing, selling,
                  and letting on hire, land and houses whether
                  multi-storey, commercial land/or residential
                  buildings on commission basis.

                  5.     To consolidate or subdivide, develop,
                  maintain, purchase, sell and letting on hire into
                  farms and sheds and to let out the same on
                  rental or license basis.

                  6.    To acquire, purchase and for the
                  construction of multi-storeyed buildings and to

ITA No. 41/2013                                                        Page 3 of 7
                  licence the flats therein on suitable terms and
                  conditions and to do the consultancy business
                  in the construction and allied activities."

5.      In Western Indian Vegetables Products Limited versus CIT,

(1954) 26 ITR 151, Bombay High Court had examined the concept and

noticed the difference between "commencement" and "setting up" of

business and it was observed as under:-

                  "The important question that has got to be
                  considered is from which date are the expenses
                  of this business to be considered permissible
                  deductions and for that purpose the section that
                  we have got to look to is section 2(11) and that
                  section defines the ,,previous year and for the
                  purpose of a business the previous year begins
                  from the date of setting up of the business.
                  Therefore it is only after the business is set up
                  that the previous year of that business
                  commences and in that previous year the
                  expenses incurred in the business can be
                  claimed as permissible deductions. Any
                  expenses incurred prior to setting up of a
                  business would obviously not be permissible
                  deductions because those expenses would be
                  incurred at a point of time when the previous
                  years of the business would not have


                  It seems to us, that the expression ,,setting up
                  means, as is defined in the Oxford English
                  Dictionary, ,,to place on foot or ,,to establish,
                  and in contradistinction to ,,commence. The
                  distinction is this that when a business is
                  established and is ready to commence business
                  then it can be said of that business that it is set

ITA No. 41/2013                                                         Page 4 of 7
                  up. But before it is ready to commence business
                  it is not set up. But there may be an
                  interregnum, there may be an interval between
                  a business which is set up and a business which
                  is commenced and all expenses incurred after
                  the setting up of the business and before the
                  commencement of the business, all expenses
                  during the interregnum, would be permissible
                  deductions under section 10(2)."

6.      The aforesaid distinction is relevant when we examine and refer

to the definition of ,,previous year. It is well settled that "date of

setting up of business" and "date of commencement of business" may

be two separate dates.

7.      In the present case, as noticed above, the respondent company

was incorporated on 4th August, 2005, i.e., in the last Assessment Year

2006-07. It had entered into a Memorandum of Understanding dated

31st May, 2006 with third parties in respect of a project near

Chandigarh, Mohali, Punjab. Subsequently, joint venture agreement

dated 5th July, 2006 was executed between the respondent and third

parties. The said factual positions are not disputed. Loan of Rs.25

crores was taken by the respondent-assessee on 16th May, 2006. We

do not think that the date of joint venture agreement, i.e., 5th July, 2006

should be and can be as a date of setting up of business. This is the

second year of operation and for the earlier year, i.e., Assessment Year

2006-07, return of income was filed on 29th November, 2006 declaring

business loss of Rs.6612/-. Date of setting up of business depends

ITA No. 41/2013                                                     Page 5 of 7
upon facts and the nature of the business. This is the reason why we

have referred to the objects for incorporation of the company and the

main business activities in which the respondent-assessee was engaged.

The first appellate authority examined the whole issue in depth and has

pointed out that the Memorandum of Understanding required

payments. The respondent-assessee had, therefore, arranged for funds.

Memorandum of Understanding is culmination of the negotiations

started and undertaken earlier and subsequently fructified on payment

by the respondent-assessee into the joint venture agreement. Setting up

of business takes place when the business is ready and first steps are

taken. In case of real estate business, the said setting up of business

was complete when first steps were taken by the respondent-assessee

to look around and negotiate with parties. There can be a gap between

setting up and when first steps were taken by the respondent and

finalisation of the first written agreement. Business activities of the

respondent did not require construction of a factory, machinery etc.

Negotiations are required to enter into a written understanding and it is

obvious that the loan was taken for business and to proceed further and

conclude the deal.    The aforesaid facts have been examined and

highlighted by the first appellate authority. The said findings of fact

have been affirmed by the tribunal. A pragmatic and a practical view

has to be taken.

ITA No. 41/2013                                                 Page 6 of 7
8.      No other contention has been raised or argued. Keeping in view

the facts founds by the first appellate authority and the tribunal, we do

not find any merit in the present appeal. In fact, decision in the case of

Samsung India Electronics Limited (supra) does not support the

appellant, but supports the findings recorded by the tribunal. The

appeal is accordingly dismissed.

                                       SANJIV KHANNA, J.

                                       SANJEEV SACHDEVA, J.
OCTOBER 8, 2013

ITA No. 41/2013                                                  Page 7 of 7
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